(Applicability & impact Analysis) By:-

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1 Domestic Transfer Pricing (Applicability & impact Analysis) By:- Surana Maloo & Co. Chartered Accountants 2 nd Floor, Aakash Ganga Complex, Parimal Under Bridge, Nr Suvidha Shopping Center, Paldi, Ahmedabad- 07 Ph: , ,

2 Domestic Transfer Pricing: Indroduced vide Finance Act 2012 The application and extension of scope of transfer pricing regulations to domestic transactions To provide objectivity in determination of income from domestic related party transactions To create legally enforceable obligation on assessees to maintain proper documentation At the same time, restricting its applicability to the transactions, which exceed a monetary threshold of Rs. 5 crores in aggregate during the year It is proposed to amend the Act to provide applicability of transfer pricing regulations (including procedural and penalty provisions) to transactions between related resident parties for the purposes of computation of income, disallowance of expenses etc. as required under provisions of sections 40A, 80-IA, 10AA, 80A These provisions shall apply in relation to the Assessment Year and subsequent assessment years.

3 Hon ble Apex Court Held as under:- Reason for extending Transfer Pricing Provisions to Domestic Transactions:- Verdict of Hon ble Supreme Court in case of CIT Vs. Glaxo Smithkline Asia (P.) Ltd. Section 40A(2), read with section 80-IA, of the Income-tax Act, 1961 and rule 10D of the Income-tax Rules, Business disallowance - Excessive or unreasonable payments - Whether in order to reduce litigation, section 40A(2) and section 80-IA(10) need to be amended to empower Assessing Officer to make adjustments to income declared by assessee, having regard to fair market value of transactions between related parties by applying any of generally accepted methods of determination of arm s length price, including methods provided under Transfer Pricing Regulations - Held, yes - Whether law should also be amended to make it compulsory for taxpayers to maintain books of account and other documents on lines prescribed under rule 10D in respect of such domestic transactions and taxpayers should obtain an audit report from their chartered accountants so that taxpayers maintain proper documents and requisite books of account reflecting transactions between related entities at arm s length price, based on generally accepted methods specified under Transfer Pricing Regulations - Held, yes

4 New Provision Inserted Section 92BA Meaning of specified domestic transaction 92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely: 1) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of section 40A; 2) any transaction referred to in section 80A; 3) any transfer of goods or services referred to in sub-section (8) of section 80-IA; 4) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA; 5) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of subsection (8) or sub-section (10) of section 80-IA are applicable; or 6) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees.

5 COVERAGE of Specified Domestic Transactions any expenditure in respect of which payment has been or is to be made to any person 56 referred to in clause (b) of this sub-section Transaction referred in section 80IA(8) and section 80IA(10) any transaction, referred to in any other section under Chapter VI-A or section 10AA or any other transaction as may be prescribed

6 Scope of Scrutiny under Domestic Transfer Pricing Section 92: Computation of income from international transaction having regard to arm's length price. Sub-section 2A inserted:- (2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. Scope of Scrutiny covers both aspects, Allowance of any expenditure as well as Income. However, these provisions shall not be applicable if results in effect of reducing the income chargeable to tax or increasing the loss

7 Provisions applicable to Specified Domestic Transactions Section Relevant Provision 92 Computation of income from international transaction having regard to arm's length price 92C 92CA 92D 92E Computation of arm's length price Reference to Transfer Pricing Officer Maintenance and keeping of information and document by persons entering into an international transaction [or specified domestic transaction] Report from an accountant to be furnished by persons entering into international transaction [or specified domestic transaction] 271(1)(c) Explanation 7

8 Section 92(2A) Computation of income from international transaction having regard to arm's length price (2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. Section 92C(1) Computation of arm's length price: Six Methods a) comparable uncontrolled price method; b) resale price method; c) cost plus method; d) profit split method; e) transactional net margin method; f) such other method as may be prescribed by the Board. Out of above, the most appropriate method shall be applied for determination of arm's length price

9 Section 92CA: Reference to Transfer Pricing Officer Sub-section Provision Applicability to Internation as well as Domestic Both? 92CA(1) AO may refer the computation of ALP to TPO Both 92CA(2) TPO to issue notice to Assessee to produce evidence in support of ALP 92CA(2A) Any other international transaction coming to notice of TPO International Transactions Only 92CA(2B) 92CA(2C) the TPO can suo moto upon the transaction coming to his notice apply the TP provisions Prohibitory clause for reopening completed cases before 01/07/2012 Both International Transactions Only International Transactions Only 92CA(3) TPO shall pass the order determining ALP Both 92CA(4) AO to compute total income accordingly Both 92CA(5) & (6) 92CA(7) Rectification of order passed u/s 92CA(3) TPO may exercise powers u/s 131 Power regarding discovery, production of evidence, etc and powers u/s 133 Power to call for information for determining ALP Provisions of Section 144C Reference to dispute resolution panel is also applicable in case of Specified Domestic Transactions, if there are variations in the order passed by TPO u/s 92CA(3). Both Both

10 Section 92D: Maintenance and keeping of information and document by persons entering into an international transaction [or specified domestic transaction] Every person who has entered into an international transaction [or specified domestic transaction] shall keep and maintain such information and document in respect thereof, as may be prescribed under Rule 10D of the Income Tax Rules. Documentation Requirement as per Rule 10D:- Concerns Related:- Industry Profile, Group Profile & Related Party Profile Most Appropriate Method Related:- Justification of Selection of Particular Method FAR (Functional, Assets & Risk) Analysis Economic Analysis Forecast, Estimates, budgets Transaction Related:- Agreements Invoices Price related correspondances

11 Default in complying Domestic Transfer Pricing:- Consequences Section & Provision Section 271AA:- Penalty for failure to keep and maintain information and document, etc., in respect of certain transactions. Penalty Chargeable 2% of the value of each specified domestic transaction entered into by such person (i) fails to keep and maintain any such information and document as required by subsection (1) or sub-section (2) of section 92D; (ii) fails to report such transaction which he is required to do so; or (iii) maintains or furnishes an incorrect information or document, Section 271(1)(c) Concealment of income Section 271BA 100% to 300% of the tax saught to be evaded ` Penalty for failure to furnish report under section 92E Section 271G Penalty for failure to furnish information or document under section 92D 2% of the value of each specified domestic transaction entered into by such person

12 Requirement to introduce Domestic Transfer Pricing

13 Practical Applicability of Domestic Transfer Pricing Allowability of Expenses Aspect Applying ALP Test to transactions covered u/s 40A(2)(b) Determination of Income Aspect Applying ALP Test to transactions covered u/s 80IA(8) & 80IA(10)

14 Transactions Covered u/s 40A(2)(b) payment of expenditures to:- According to this section payments to following persons shall be covered:- any director of the company, or any relative of such director a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member 58a [or any other company carrying on business or profession in which the first mentioned company has substantial interest]; a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; any person who carries on a business or profession, where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. For the purposes of this section, a person shall be deemed to have a substantial interest in a business or profession, in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than 20% of the voting power; and In Domestic Transfer Pricing, the Assessee has to prove that the transactions with above persons are entered into at Arms Length Price

15 Determination of Income Aspect Applying ALP Test to transactions covered u/s 80IA(8) & 80IA(10) With respect to transactions u/s 80IA(8) With respect to transactions u/s 80IA(8) Applicability - Inter unit transfer of any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee & vice versa; - the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, Re-working of Profits:- for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods [or services] as on that date Applicability - owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that - the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business Re-working of Profits:- Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom The Assessee has to prove that the transactions so entered are at Market Price / Arms Length Price, duly justified with the transfer pricing method adopted by the Assessee & relevant documents.

16 Report of Accountants: Section 92E Every person who has entered into an international transaction [or specified domestic transaction] during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date Specified Date : 30th day of November of the assessment year (Ref: Explanation 2(aa) to Section 139 of the Act) Specified Form: Form 3CEB Failure to do so may attract penalty of ` : Section 271BA

17 Comparative Analysis of the Situation Post Amendments 2012 Pre-Amendment Provisions Post Amendment of Domestic Transfer Pricing Provisions Concept of Fair Market Value (FMV) was prevalent Concept of Arms Length Price (ALP) adopted to specified domestic transactions too for computing FMV there was no method as such For determining ALP there are six methods notified in section 92C No documentation required to be Maintained Contemporaneous documentation required to be maintained u/s 92D Other than reporting in tax audit report, no statutory compliance - Tax Audit related party transaction disclosure and - Accountant s report signed by a CA to be filed Assessment done by the AO Assessment is now by the TPO for the specified domestic transactions & than same is merged into Assessment by AO

18 Disclaimer Full care have been taken While doing the analysis, however we disclaim any liability if any arise. Thanks